The new economic stimulus package that the Bush Administration signed into law May 28 promises immediate tax relief for construction firms, but critics believe it will do little for large contractors already holding vast amounts of equipment in their fleets.
"We don't buy equipment just to buy equipment," says Bob Andrade, vice president of equipment management for The Walsh Group, Chicago, which operates 1,200 pieces of heavy equipment across 30 states. When the fleet is underutilized, "we sell the machinery," Andrade says. "My CFO is more interested in seeing the assets turn back into cash."
This year's Jobs and Growth Tax Relief Reconciliation Act is an attempt by Washington to spur economic activity in the construction and manufacturing sectors. It is a follow-up to last year's Job Creation and Worker Assistance Act, which established a write-off depreciation bonus for the first year of ownership of new equipment. Instead of depreciating through traditional Internal Revenue Code methods, buyers could receive an instant 30% write-off of a machine's total cost during the first year and begin depreciating the remaining 70% value over its peak life span, typically five to six years. Now, the new package increases first-year write-offs to 50%.
"Tax savings in the first year when economic times are tough is a good way to put cash in your pocket, which you can then take and invest," says Christian Klein, Washington counsel for Associated Equipment Distributors, Oak Brook, Ill. Under the former law, buyers had a tax savings of $9,600 for the first year of owning a $100,000 piece of equipment, says Klein. This year's allowance increases to $16,000 for the same buy.
Nick Yaksich, vice president of government affairs for the Association of Equipment Manufacturers, says these types of stimulus plans are "a piece of the puzzle" toward economic recovery, but construction demand ultimately will govern whether or not contractors need to purchase new equipment.
Andrade agrees and says the new law likely provides more tax benefits for smaller firms. "In our style of businessbeing a larger general contractorwe only buy the assets when they are required," he says.
Section 179 of the new tax code lets buyers with few annual purchases opt out of depreciation and expense property outright. This year's tax code allows for a $100,000 expense limit against $400,000 of expenditures, compared to a former $25,000 limit against $200,000.
Prior to the law's enactment, AED partnered with the National Utility Contractor's Association, Arlington, Va., in a May research study to determine the efficacy of tax-relief programs on equipment purchasing. Klein, who wrote the executive summary, says utility contractors who responded to the survey showed enthusiasm for the IRS package, but "I don't think a contractor is going to buy a piece of equipment that it has no use for."
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